Risk Sharing, the Cost of Equity and the Optimal Capital Structure of the Regulated Firm

Clive J Stones

Discussion Papers from Department of Economics, University of York

Abstract: This paper considers the relationship between the regulator's pricing decision and the allocation of risk between consumers and shareholders. Consumers are willing to trade-off price variations against a lower expected price. Prices are higher in adverse economic conditions but shareholder returns are not necessarily lower. It might be optimal to insure shareholders against market risk to achieve a lower expected price. The socially optimal capital structure depends on consumers' and shareholders' attitudes to risk. There is only one very special set of conditions where the social optimum is 100% debt finance with the firm operating ona 'not-for-profit' basis.

Keywords: Regulation; gearing; leverage; debt finance; equity finance. (search for similar items in EconPapers)
JEL-codes: G32 G38 L51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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